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Magnuson-Moss Trumps FTC’s Holder Rule
By Clayton S. Swears

Next time you pick up a motor vehicle retail installment contract, look for a conspicuous notice that says

“ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.”

That notice is required by federal law, specifically by the Federal Trade Commission’s Preservation of Consumer Claims and Defenses Trade Regulation Rule, popularly called “the Holder Rule.” It is called the Holder Rule because it was designed to stop the holders of credit contracts from claiming that they weren’t subject to the customer’s claims that, for instance, goods financed under the contract were deficient. Until the Holder Rule, the assignee of a contract from a seller could dodge such claims on the grounds that it was a “holder in due course.” Abuses in consumer finance led the FTC in 1975 to abolish this protection for the contract assignee.

Over the years, the interaction between the Holder Rule and other state and federal laws has led to several court fights, as assignees argued that the Holder Rule was trumped by such other laws. A recent case brought before the U.S. District Court for the Southern District of New York dealt with how the Magnuson-Moss Warranty Act and the Holder Rule mesh.

Anthony Angelillo bought a 2007 Nissan 350Z from Harte Nissan, Inc. Harte described the car as “new” in the purchase order. After the sale, Harte assigned the retail installment contract to Nissan Motor Acceptance Corporation (NMAC). Unknown to Angelillo, the car had been involved in a serious accident prior to the sale. After experiencing several problems with the car, Angelillo learned of the accident. Angelillo told Harte and NMAC that he was revoking his acceptance of the car, but they did not refund his money. Angelillo then sued Harte and NMAC for violating the Magnuson-Moss Warranty Act and the Connecticut Unfair Trade Practices Act.

Harte and NMAC moved to dismiss arguing that there was no basis for federal jurisdiction over the MMWA claim because the alleged damages did not reach the $50,000 threshold. NMAC also argued that, as a financier, it was not liable under the MMWA. The U.S. District Court for the Southern District of New York retained jurisdiction over the case but dismissed the MMWA claim against NMAC, despite the presence in the financing contract of the Holder Rule notice.

In determining whether the damages threshold for federal jurisdiction was satisfied, the court noted that finance charges, legal fees, and the residual value of the car had to be excluded from the total. Angelillo did not present evidence of the residual value. However, the court determined that the $35,000 purchase price, along with Angelillo’s estimate of punitive damages of between $20,000 and $50,000, was sufficient to satisfy the $50,000 threshold.

With respect to the MMWA claim, Angelillo argued that the Holder Rule notice in the contract subjected NMAC to the MMWA claims that he brought against Harte. The court found that the limitation-of-liability provision in the MMWA superseded the FTC-required notice in the contract. Therefore, Angelillo could not assert a claim against NMAC, as assignee, under the MMWA.

NMAC’s argument that the Holder Rule doesn’t apply, even though the Holder Rule’s notice appears as part of the retail installment contract, has not been a winner in every case, but, as this case proves, it is an argument worth making.

Clayton S. Swears is an associate in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Clay at 410-865-5419 or by email at cswears@hudco.com.

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